Basis of Presentation and Summary of Significant Accounting Policies

We are a wholesale power generation company engaged in the ownership and operation of primarily natural gas-fired and geothermal power plants in North America. We have a significant presence in major competitive wholesale power markets in California, Texas and the Mid-Atlantic region of the U.S. We sell wholesale power, steam, capacity, renewable energy credits and ancillary services to our customers, which include utilities, independent electric system operators, industrial and agricultural companies, retail power providers, municipalities, power marketers and others. We purchase primarily natural gas and some fuel oil as fuel for our power plants and engage in related natural gas transportation and storage transactions. We purchase electric transmission rights to deliver power to our customers. We also enter into natural gas and power physical and financial contracts to hedge certain business risks and optimize our portfolio of power plants.

Basis of Interim Presentation — The accompanying unaudited, interim Consolidated Condensed Financial Statements of Calpine Corporation, a Delaware corporation, and consolidated subsidiaries have been prepared pursuant to the rules and regulations of the SEC. In the opinion of management, the Consolidated Condensed Financial Statements include the normal, recurring adjustments necessary for a fair statement of the information required to be set forth therein. Certain information and note disclosures, normally included in financial statements prepared in accordance with U.S. GAAP, have been condensed or omitted from these statements pursuant to such rules and regulations and, accordingly, these financial statements should be read in conjunction with our audited Consolidated Financial Statements for the year ended December 31, 2012, included in our 2012 Form 10-K. The results for interim periods are not necessarily indicative of the results for the entire year primarily due to acquisitions and disposals of assets, seasonal fluctuations in our revenues, timing of major maintenance expense, variations resulting from the application of the method to calculate the provision for income tax for interim periods, volatility of commodity prices and unrealized gains and losses from commodity and interest rate derivative contracts.

Use of Estimates in Preparation of Financial Statements — The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses and related disclosures included in our Consolidated Condensed Financial Statements. Actual results could differ from those estimates.

Reclassifications — Certain reclassifications have been made to our Consolidated Condensed Statements of Operations and Cash Flows for the period ended September 30, 2012, to conform to the current period presentation. Our reclassifications are summarized as follows:


•	We have reclassified environmental compliance expense, primarily related to costs to comply with the Regional Greenhouse Gas Initiative in the Northeast, previously recorded in other operating expenses of $4 million and $9 million to Commodity expense on our Consolidated Condensed Statements of Operations for the three and nine months ended September 30, 2012, respectively.


•	We have reclassified $4 million on our Consolidated Condensed Statement of Cash Flows for the nine months ended September 30, 2012, to separately report proceeds from the exercises of stock options, previously reflected in other cash flows used in financing activities.

Cash and Cash Equivalents — We consider all highly liquid investments with an original maturity of three months or less to be cash equivalents. We have certain project finance facilities and lease agreements that require us to establish and maintain segregated cash accounts, which have been pledged as security in favor of the lenders under such project finance facilities, and the use of certain cash balances on deposit in such accounts is limited, at least temporarily, to the operations of the respective projects. At September 30, 2013 and December 31, 2012, cash and cash equivalents included $195 million and $131 million, respectively, that were subject to such project finance facilities and lease agreements.

Restricted Cash — Certain of our debt agreements, lease agreements or other operating agreements require us to establish and maintain segregated cash accounts, the use of which is restricted. These amounts are held by depository banks in order to comply with the contractual provisions requiring reserves for payments such as for debt service, rent, major maintenance and debt repurchases or with applicable regulatory requirements. Funds that can be used to satisfy obligations due during the next 12 months are classified as current restricted cash, with the remainder classified as non-current restricted cash. Restricted cash is generally invested in accounts earning market rates; therefore, the carrying value approximates fair value. Such cash is excluded from cash and cash equivalents on our Consolidated Condensed Balance Sheets and Statements of Cash Flows.

The table below represents the components of our restricted cash as of September 30, 2013 and December 31, 2012 (in millions):



	September 30, 2013						December 31, 2012
	Current		Non-Current		Total		Current		Non-Current		Total
Debt service⁽¹⁾	$	19	$	43	$	62	$	11	$	41	$	52
Rent reserve	4		—		4		—		—		—
Construction/major maintenance	26		11		37		32		14		46
Security/project/insurance	131		7		138		101		3		104
Other	5		2		7		49		2		51
Total	$	185	$	63	$	248	$	193	$	60	$	253

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(1)	At September 30, 2013 and December 31, 2012, amounts restricted for debt service included approximately $24 million and $25 million, respectively, of repurchase agreements with a financial institution containing maturity dates greater than one year.

Inventory — At September 30, 2013 and December 31, 2012, we had inventory of $325 million and $301 million, respectively. Inventory primarily consists of spare parts, stored natural gas and fuel oil, emission reduction credits and natural gas exchange imbalances. Inventory, other than spare parts, is stated primarily at the lower of cost or market value under the weighted average cost method. Spare parts inventory is valued at weighted average cost and is expensed to plant operating expense or capitalized to property, plant and equipment as the parts are utilized and consumed.

Property, Plant and Equipment, Net — At September 30, 2013 and December 31, 2012, the components of property, plant and equipment are stated at cost less accumulated depreciation as follows (in millions):



	September 30, 2013		December 31, 2012		Depreciable Lives
Buildings, machinery and equipment⁽¹⁾	$	15,862	$	14,774	3 – 47 Years
Geothermal properties	1,256		1,243		13 – 59 Years
Other	155		142		3 – 47 Years
	17,273		16,159
Less: Accumulated depreciation	4,768		4,390
	12,505		11,769
Land	103		98
Construction in progress⁽¹⁾	431		1,138
Property, plant and equipment, net	$	13,039	$	13,005

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(1)	The change from December 31, 2012 to September 30, 2013 can primarily be attributed to our Russell City and Los Esteros power plants commencing commercial operations during the third quarter of 2013.

Capitalized Interest — The total amount of interest capitalized was $9 million and $10 million for the three months ended September 30, 2013 and 2012, respectively, and $33 million and $27 million for the nine months ended September 30, 2013 and 2012, respectively.

Leases — We have contracts, such as certain tolling agreements, which we account for as operating leases under U.S. GAAP. Generally, we levelize certain components of these contract revenues on a straight-line basis over the term of the contract. The total contractual future minimum lease rentals for our contracts accounted for as operating leases at September 30, 2013 are as follows (in millions):



2013	$	142
2014	644
2015	660
2016	602
2017	566
Thereafter	3,110
Total	$	5,724

Treasury Stock — During the nine months ended September 30, 2013, we repurchased common stock with a value of $462 million and withheld shares with a value of $13 million to satisfy tax withholding obligations associated with the vesting of restricted stock awarded to employees and net share employee stock options exercises under the Equity Plan.

New Accounting Standards and Disclosure Requirements

Disclosures about Offsetting Assets and Liabilities — In December 2011, the FASB issued Accounting Standards Update 2011-11, “Balance Sheet - Disclosures about Offsetting Assets and Liabilities” to enhance disclosure requirements relating to the offsetting of assets and liabilities on an entity’s balance sheet. The update requires enhanced disclosures regarding assets and liabilities that are presented net or gross in the statement of financial position when the right of offset exists, or that are subject to an enforceable master netting arrangement. In January 2013, the FASB issued Accounting Standards Update 2013-01, “Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities” to provide clarification that the scope previously defined in Accounting Standards Update 2011-11 applies to derivatives, repurchase agreements, reverse repurchase agreements and securities borrowing and lending transactions that are subject to an enforceable master netting arrangement or similar agreement. The new disclosure requirements relating to these updates are retrospective and effective for annual and interim periods beginning on or after January 1, 2013. We adopted Accounting Standards Updates 2011-11 and 2013-01 as of January 1, 2013. As these updates only required additional disclosures, adoption of these standards did not have a material impact on our financial condition, results of operations or cash flows. See Note 5 for disclosures regarding our assets and liabilities that are presented gross on our Consolidated Condensed Balance Sheets when the right of offset exists, or that are subject to an enforceable master netting arrangement.

Comprehensive Income — In February 2013, the FASB issued Accounting Standards Update 2013-02, “Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income” to amend the reporting of reclassifications out of AOCI to require an entity to report the effect of significant reclassifications out of AOCI on the respective line items in net income if the amount reclassified is required under U.S. GAAP to be reclassified in its entirety to net income in the same reporting period. An entity shall provide this information together in one location, either on the face of the statement where net income is presented, or as a separate disclosure in the notes to the financial statements. The new disclosure requirements relating to this update are prospective and effective for interim and annual periods beginning after December 15, 2012, with early adoption permitted. We adopted Accounting Standards Update 2013-02 as of January 1, 2013. As this update only required additional disclosures, adoption of this standard did not have a material impact on our financial condition, results of operations or cash flows. See Note 5 for disclosures on the affect of significant reclassifications out of AOCI on the respective line items on our Consolidated Condensed Statements of Operations.

Income Taxes — In July 2013, the FASB issued Accounting Standards Update 2013-11, “Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists”. The provisions of the rule require an unrecognized tax benefit to be presented as a reduction to a deferred tax asset in the financial statements for an NOL carryforward, a similar tax loss, or a tax credit carryforward except in circumstances when the carryforward or tax loss is not available at the reporting date under the tax laws of the applicable jurisdiction to settle any additional income taxes or the tax law does not require the entity to use, and the entity does not intend to use, the deferred tax asset for such purposes. When those circumstances exist, the unrecognized tax benefit should be presented in the financial statements as a liability and should not be combined with deferred tax assets. The new financial statement presentation provisions relating to this update are prospective and effective for interim and annual periods beginning after December 15, 2013, with early adoption permitted. We are currently assessing the future impact of this update, but we do not anticipate a material impact on our financial condition, results of operations or cash flows.